ASK THE EDD LAWYER – DOES RELIANCE ON AN ATTORNEY’S ADVICE CONSTITUTE REASONABLE CAUSE FOR THE ABATEMENT OF PENALTIES?
By Robert S. Schriebman
In March 2014 the California State Board of Equalization reached a decision on the Appeal of Delacroix. Mr. Delacroix received a settlement in a lawsuit he brought against his employer seeking damages for emotional distress. He consulted a tax attorney to determine whether the settlement award was taxable income. Part of the award settlement included damages for physical injury. While damages received for emotional distress constitute taxable income, damages received for physical injury are excludable from income.
The tax attorney researched the issue and concluded that the matter was a gray area and was not ultimately decided by any high state or federal court in California. Mr. Delacroix decided not to include any of the award in his tax return as taxable income. The Franchise Tax Board (FTB) had the opposite opinion. The FTB assessed a tax coupled with a stiff accuracy-related penalty (both the FTB and the IRS can impose an accuracy-related penalty).
Mr. Delacroix disagreed with the FTB and sought a hearing before the State Board of Equalization (SBE). Each year each of the five members of the SBE plus a representative of the State Controller meet at various locations throughout the State to hear taxpayer matters involving income taxes and sales and use taxes. In the case of Mr. Delacroix the SBE ruled that because there was uncertainty evidenced by various Tax Court Decisions and the fact that the Ninth Circuit had not issued an opinion on the issue, the FTB should abate in full the accuracy-related penalty.
Does reliance on professional advice from an attorney or accountant serve as reasonable cause to abate penalties? The answer is yes. In 1985 the U.S. Supreme Court decided Boyle v U.S. 85-1 USTC ¶13602. In Boyle the Court made a distinction between reliance on procedural matter versus reliance on substantive matters of tax law as establishing a standard for reasonable cause. Most penalties can be abated due to reasonable cause. The Supreme Court held that for mere procedural matters, such as the deadline for filing tax returns, reliance on professional advice is not considered reasonable cause because, as the Court stated, “This requires no special training or effort to ascertain a deadline and make sure that it is met.” However, reliance upon professional advice for substantive tax matters may very well constitute reasonable cause to abate penalties.
In the Delacroix matter, the tax attorney gave an opinion on substantive tax issues and not procedural tax issues.
Both the FTB and IRS love to impose all sorts of penalties that they tack on to a tax assessment. Most of the penalties are delinquency penalties such as a penalty for a late-filed return or the late payment of a tax. The next most popular penalty is the accuracy-related penalty. As far as the FTB is concerned you may challenge these penalties upon receiving a Notice of Proposed Assessment (NPA). After the NPA is filed with the FTB you will receive an administrative hearing by the FTB audit staff. If things do not go your way you may appeal the decision after you receive a Notice of Action (NA). The NA entitles you to a hearing before the members of the State Board of Equalization.
I have heard it told, and I have personally experienced, a liberal attitude on the part of members of the SBE toward the abatement of penalties. The SBE might affirm the FTB’s tax determination, but they are inclined to abate penalties and interest on those penalties. It all comes down to this, “If you don’t ask – you don’t get.”
An EDD lawyer, Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States.
As a trusted EDD attorney, Robert S. Schriebman has successfully dedicated more than 30 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House and the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure”, both published by Commerce Clearing House.